The US stock market is going up because Donald Trump needs it to go up.
He won’t win a second term in office in 2020 if there’s a major bear market during his administration.
Here’s how former White House official, Anthony Scaramucci puts it:
“… the only poll the president’s really concerned about is the S&P 500. He looks at that pretty much daily and if it’s going in the right direction, he thinks his re-election chances are pretty great.”
So, Trump’s throwing everything he can at stock markets to keep them moving higher.
Market-propping propaganda
Like tweeting that there’s “substantial progress” in the China trade situation… (Really? Let’s see it!)
And like telling the world in his recent State of the Union address that America has “far and away the hottest economy anywhere in the world”…
(Not true – as the IMF reported in January, US growth is slowing and plenty of other economies, such as China and India are growing faster…)
But a lot of people are buying Trump’s feel-good propaganda.
That’s why the Dow keeps on moving higher.
Even in the face of stalling economic growth…
A stalemate in US-China trade negotiations…
A damning character assassination of Trump by his former lawyer…
A looming crisis in the EU which, as a group, is America’s largest trading partner…
And a damp squib of a summit meeting with North Korea’s stubborn dictator this week.
Of course, by now we know why stocks are rising without check…
Held up by the hand of Powell
Many investors are banking on Trump’s No.1 puppet, Fed Chairman, Jerome Powell, doing whatever it takes to keep the economy going… and the market rising.
Remember, The Powell Put is in place… everything will be alright!
Well that remains to be seen.
To me it makes sense to be cautious.
And not bank on the stock market being a one-way ride.
There are too many threats out there. Some known and some unknown.
Any one of them could derail this admittedly impressive rally.
We’ve talked a lot in these pages about the threats of the US-China trade war.
And the danger posed by the fact that China’s economic growth is at its lowest for almost 30 years.
But what about the risk to US and global growth from what’s unfolding right here in the UK?
‘Bad Brexit’ could wreck the world economy
With just a month to go until the UK must leave the EU, deal or no deal, we’re reaching crisis point.
The government doesn’t seem to know what it wants… or how to get it.
And the opposition parties are in-fighting, too.
I don’t know whether this apparent incompetence on the part of Theresa May is a façade… an exercise in ‘running down the clock’ as people suggest.
But the risk of no deal is real – and according to some analysts has major implications…
Not just for the UK and for Europe… but for the entire world economy.
And that means it’s a major threat for stock markets, too.
Randy Frederick, vice president of trading and derivatives at Charles Schwab, told Business Insider:
“The Brexit issue is, I think, a bigger issue than a lot of people realize. I think retail investors don’t really get how big that is and how much of an impact it could have. I think everybody understands the China issue, and I think it’s just because it’s the stuff that they interact with on a daily basis.”
He’s talking about the prospect of a no-deal “hard Brexit”.
And Frederick believes if that happens it would “almost certainly throw the UK into a substantial recession that spreads to the euro area…”
Worse still, he told Business Insider, “a no-deal Brexit that tanks the European economy would raise the chances of an economic recession in the US by 2020.”
And Frederick is not the only analyst warning about this.
Another systemic risk that could bring markets down
Carolyn Fairburn is the director general of the Confederation of British Industry or CBI.
At the latest World Economic Forum in Davos, she said Brexit had “joined a list of systemic risks to the world economy”.
She told the Guardian: “It is everyone’s interest that Britain leaves the EU in a way that works for the British economy, the European economy and indeed the global economy.”
Meanwhile, the IMF says that a no-deal Brexit “could lead to fragmentation in European money markets, meaning that finance cannot flow around the system so efficiently.”
Again, with the EU being such a major partner for the US and other countries, the implications for the world economy are ominous.
There’s not a day that goes past that we don’t read something or hear on the news about the unfolding Brexit chaos.
And we can expect that to increase over the next month. And if international investors take fright, we’ll see it play out in falling markets.
It’s no longer just the US-China situation that’s hanging over markets like a black cloud…
What’s happening here in the UK and in Europe is just as important.
If this ends badly, it could be the trigger that finally starts a major sell-off in the markets.
Time to tread carefully
That’s not to say that we should pull out of the market entirely.
I’m certainly not.
The transaction costs of selling all holdings would be counterproductive – especially if you plan on holding those stocks for many years.
It’s more about thinking carefully about how much capital you commit to what to looks like a tired and overdone bull market…
And where you put it.
Don’t chase the latest fad stocks if they’re trading at all-time highs.
Or companies with ridiculously high earnings multiples that can’t be justified by their growth prospects.
Remember, the old saying that a rising tide lifts all boats…
When the stock market is rising relentlessly, there’s a good chance that some individual stocks are trading a lot higher than they should be.
And if the rally runs out of steam and turns lower… those stocks could turn too and fall fast.
On the other hand, there may be some companies you are convinced are a great long-term bet. Stocks that you’re itching to buy.
Personally, I wouldn’t be investing my entire intended stake, not with the wider markets at these elevated levels.
But one way to deal with it may be to put a portion of what you intend to invest to work now.
And hold some back for another time.
You may pay more for your next portion of shares if the market keeps rising.
But you may get them at a better price if the market pulls back.
A good time to be making a ‘shopping list’
We’ve talked in previous issues of Monkey Darts about spreading your risk into other markets, away from stocks.
So, putting some of your wealth into alternative assets like gold, silver and cryptocurrencies.
And another strategy to consider is building a “shopping list” of stocks that you like the look of.
Then, if the market does correct, you can pick them up at a better price.
If you’re looking for ideas, keep reading Monkey Darts.
My colleague Robert White has been coming up with some great ideas in recent issues.
These are companies involved in fascinating, ground-breaking areas of healthcare, energy and dealing with food and water scarcity.
In other words, businesses tackling problems that will always need solving.
Have a look around the Monkey Darts archive to see some of the captivating ideas he’s been writing about.
Of course, if there is a major global stock market collapse, these stocks won’t be immune…
Falling tide and all that…
But what Robert’s looking at is companies building the technologies of tomorrow.
These are ideas that could have huge long-term potential, whatever the market does in the short term.
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